Investor compass rotating towards emerging market funds

Emerging markets equity and bond funds maintained their strong start to the New Year during the second week of January, absorbing another USD7.2bn between them and taking their combined inflows for the first 16 days of 2013 over the USD18bn mark.

During the same period last year they had taken in just over USD4bn.

The flows in emerging markets equity funds helped all EPFR Global-tracked equity funds outgain their bond fund counterparts for the fifth straight week. The margin was, however, much slimmer than the previous week’s USD15.6bn gap in favour of equity funds. Those funds took in a net USD7.19bn during the week ending 16 January, with roughly 20 per cent of those flows going to dividend equity funds versus eight per cent the previous week, while bond funds attracted a 10 week high of USD6.95bn.

Equity funds did attract retail money for the second week running, the first time that has happened since the second half of April 2011.

Having set a new inflow record during the first full week of January, EPFR Global-tracked emerging markets equity funds followed that up with their fifth biggest inflow as they outgained developed markets equity funds for the sixth time in the past seven weeks. Flows again favoured the diversified global emerging markets equity funds, which absorbed a net USD3.7bn, and fund groups associated with China.

Ahead of fourth quarter GDP numbers expected to confirm China’s growth is regaining momentum, investors extended China equity funds’ current inflow streak to 19 weeks and more than USD10bn. With China’s benchmark index recently hitting a seven month high China equity funds are the second best performers among the major Asia ex-Japan equity fund sub groups, lagging only the eye-popping 17.6 per cent gain chalked up by Vietnam equity funds which saw inflows jump to their highest level since June 2008.

Flows into Latin America equity funds climbed to a 12 week high as investors finally translated Chinese and US growth into stronger demand for the region’s exports. But their reservations about the region’s largest economy were reflected in another week of lacklustre flows for Brazil equity funds which were outgained by Mexico equity funds for the eighth straight week.

EMEA equity funds, meanwhile, saw flows dwindle as doubts about Russia’s economic policymaking sapped enthusiasm for the world’s second largest oil producer. Talk of reform has been drowned out recently by nationalist rhetoric – and legislation – aimed at limiting foreign influence in Russian life.

Retail investors committed fresh money to all of the major EPFR Global-tracked developed markets equity fund groups for the second week running going into the third week of January. But institutional support for US and Japan equity funds faltered during a week when the World Bank downgraded some of its forecasts and the latest GDP numbers from Germany prompted some investors to question the recent optimism surrounding the Eurozone.

That optimism was still evident when it came to diversified Europe regional equity funds, which took in a combined USD1.4bn that offset outflows from most country fund groups: redemptions from Germany and Switzerland equity funds hit nine and 10 week highs respectively while France equity funds recorded outflows for the 17th consecutive week. Italy equity funds, meanwhile, attracted fresh money for the 10 week running despite evidence that former Prime Minister Silvio Berlusconi’s party is gaining ground in the run-up to next month’s election and could be in a position to block the formation of a another centrist coalition.

Efforts by Japan’s new government to kick-start the world’s third largest economy have also been generating some optimism among pundits, fund managers and retail investors. But retail commitments this week to Japan equity funds were trumped by the biggest redemptions from domestically domiciled Japan ETFs in over three years.

In a reversal of recent trends, ETFs drove the net outflows also experienced by US equity funds as actively managed funds recorded back-to-back weeks of inflows for the first time in over 14 months. Recent macroeconomic and earnings data has been largely supportive of US equity markets, with key indexes hitting five year highs. But another political struggle over the country’s debt ceiling looms.

Global equity funds, the major diversified developed markets fund groups, enjoyed another strong week that saw over USD2bn flow into this fund group..

Faith in a recovering US housing market and China’s economy saw EPFR Global-tracked real estate and commodities sector funds both pull in over USD800bn in fresh money during the week while some better than expected earnings reports helped financial sector funds pull in over USD1bn.

The strong flows into commodities sector funds came despite modest net outflows from gold funds. But a single silver ETF was by far the biggest recipient of new money, followed by a copper fund and a general metals and mining fund. Energy sector funds, meanwhile, continued to struggle despite hopes of stronger growth in the US and China, colder weather in parts of the Northern Hemisphere and slowing Saudi Arabian oil production.

Fresh evidence that US home prices are on the rise helped to boost flows into real estate sector funds, which recorded their biggest weekly inflow since late 3Q09. It also provided another boost for financial sector funds, as investors translated that trend into significant drops in the number of US mortgages that are “underwater.”

Two weeks into the New Year EPFR Global-tracked bond funds have taken in over USD13bn, some USD2bn more than at the same point last year, as investors continue to see some value in the riskier fixed income asset classes. Flows into emerging markets bond funds hit a 50 week high as this fund group extended an inflow streak stretching back to early June, high yield bond funds took in another USD1.1bn and Europe bond funds took in fresh money for the 14th time in the past 16 weeks.

As with their equity counterparts, fixed income investors looking to Europe favoured regional fund groups with only Sweden bond funds standing out among the Europe country bond funds. The sub group with by far the best performance numbers, UK bond funds, recorded their third straight week of outflows.

Flows into US bond funds favoured funds focused on municipal debt, bank loans and total return strategies. Municipal bond funds took in over USD1bn for the second week running while commitments to US floating rate bond funds hit their highest level since 1Q11.

Local currency emerging markets bond funds, which posted their biggest weekly inflow in over nine years, outgained their hard currency counterparts by a five to two margin. At the country and regional level China bond funds continued their strong run while emerging Europe regional funds attracted the most money since the fourth week of January 2011.